How a Shifting Regulatory Landscape in India is Increasing Investor Confidence

Q&A with Mansi Mehta, Associate Partner in BDO India’s Business Advisory Services—Forensics Practice

Glenn Pomerantz, global leader of BDO’s Global Forensics practice, recently had the opportunity to interview Mansi Mehta, an associate partner in BDO India’s Business Advisory Services—Forensics practice. With a background in risk and fraud advisory, Mansi has had extensive global experience in the U.S., Canada, Singapore, Dubai, and India specializing in business development, business analysis, fraud management, and product management.
 
In this Q&A, she shared with Glenn her thoughts on key corruption, forensics, and business trends in India, including recent regulatory developments, fraud prevention best practices, and more.

1. Please tell us more about your area(s) of expertise and how your experience has prepared you for your role at BDO.
My expertise spans a spectrum of forensic solutions, such as fraud investigations, Anti Bribery Anti-Corruption (ABAC) reviews, background and integrity due diligence, cyber and digital forensics, and litigation support services. I have served as an expert witness in the U.S. Bankruptcy Courts of New York and Delaware related to India’s largest banking fraud cases, as well as in U.K. courts in relation to the diversion and siphoning of funds, leading to criminal procedures. I have worked on several complex, data-intensive analysis projects, including engagements related to fraud investigation for regulators, investigative agencies, and both private and public banks in India. My global experience includes an FCPA investigation of an IT/ITeS company listed on NYSE, anti-corruption compliance reviews of an oil and gas company headquartered in the UAE, and integrity due diligence assessments on behalf of Singapore’s government. My prior experience in managing risk and fraud advisory engagements in the North American and Asian markets has enabled me to lead high-profile cross border investigations, including those for overseas government agencies, multinational corporations, Indian regulatory bodies, and conglomerates.

I joined BDO India in 2015 as the firm began undertaking an initiative to substantially grow its Forensics practice. Through my existing experience in forensics, along with leveraging BDO’s platform, leadership support, and global referrals, BDO India’s Forensics practice has seen significant growth over this period. Today, it has three partners and more than 80 skilled professionals across disciplines such as forensic accounting, fraud investigation, cyber technology, market intelligence, and data analytics. Our diverse service offerings, client management skills, and strong credentials have enabled us to become preferred service providers in a market historically dominated by global consulting firms.

2. What type of engagements (or industries) is your work focused on, and where is there greatest demand for your services? Where do you anticipate demand will grow the fastest?
We cater to varied sectors such as banking and finance, manufacturing, pharmaceuticals, real estate, and service industries. However, recently, there have been significant reforms in the Indian regulatory and legal space related to handling of fraud and corruption matters. Recent developments include the introduction of the ‘Insolvency and Bankruptcy Code 2016,’ as well as actions initiated by the Ministry of Corporate Affairs against 224,000 suspected shell companies. In addition, the introduction of the Fugitive Economic Offenders Act enables the government to confiscate the properties of alleged fraudsters who evade prosecution by remaining outside the jurisdiction of Indian courts and whose proceeds from crime exceed INR 1 billion (about $14 million USD).

The Indian banking system is facing a crisis in the form of increasing gross non-performing assets (GNPA), which rose to 11.2 percent in March 2018, amounting to approximately $147 billion. The sharp rise in GNPAs and the resulting increase in provisioning costs led to the banking system reporting a net loss of about $6 billion. In this context, the Reserve Bank of India has mandated banks to undertake forensic audits of non-performing assets over INR 500 million (about $7 million). Furthermore, the Insolvency and Bankruptcy Code 2016 (‘IBC’ or ‘the Code’) is set to be a game changer, seeking to deal with insolvency and liquidation proceedings in a time-bound and efficient manner. This will maximize the value of assets and enhance investor confidence by providing an efficient framework to deal with business failures. Because the IBC contains provisions on fraudulent or wrongful trading transactions, it is expected by the Insolvency Professional (IP) to unearth and report transactions of questionable nature. Therefore, forensic audit is mandated to assist the IP before liquidation and buyout proceedings.

Our role in forensic audits is to identify whether there are undervalued transactions through related or other entities, preferential transactions with a group of creditors and customers, transactions defrauding creditors, circular transactions, and unauthorized creation of assets. Our primary responsibility is to assess end-utilization of funds, identify instances of diversion or siphoning of funds, and identify non-genuine business operations and financial misrepresentation to display a larger picture to stakeholders and lenders.

Today, we anticipate an increasing demand for forensic audits being mandated by national investigative agencies and banking regulators on indebted Infrastructure NBFC’s, steel and power, telecom, and oil and gas companies.
 
3. What unique business opportunities and challenges exist for U.S. businesses operating in, or expanding to, India?
India’s leap on the World Bank’s ‘Ease of Doing Business Index,’ from 100th out of 190 economies in the world in 2017, to the 77th position in 2018 (i.e. India has improved its rank by 53 positions in the last two years and 65 positions in the last four years), is helping to build confidence and attract more investors to the country. The economy and size of the domestic market are both key magnets for U.S. businesses, along with the availability of increasingly skilled and cost-effective labor, possessing fluency in English. U.S. companies investing in India comprise a major portion of foreign countries operating in the Indian market.

India offers low-cost amenities and maintains a very friendly business culture. The laws and regulations, such as its Goods and Services Tax, are business-centric and promote transparency and uniformity. These factors enable the companies entering or expanding into India to sail through favorable conditions. Fueled by the Indian government’s move to stimulate the economy by easing the hurdles to foreign direct investment (FDI), the potential for U.S. companies doing business with India is quickly growing.

However, there are also rumbling concerns and challenges for businesses in India. This includes the risk of bribery and corruption, especially in government departments; complex processes involved in land acquisition procedures; complex procedures for obtaining construction permits; the possibility of litigation issues due to inheritance; fragmented holdings; and excessive reliance on cash payments.

4. What anti-corruption legislation should U.S. businesses operating in India be aware of? What additional legislation might be coming down the pike?
Recently, the Indian government has amended its corruption law, the Prevention of Corruption Act 1988 (POCA), to make it more robust and integrate parlance of the Foreign Corrupt Practices Law. The POCA was enacted in 1988, and for almost 25 years, the perception of India as a country with high corruption levels went unchallenged. As such, the POCA was amended in July 2018 as a step to change such perceptions and gain acceptance in the global business community.

The POCA amendment introduces corporate liability, wherein offences committed by a commercial organization, including those incorporated outside of India, shall be punishable by fine. Previously, the POCA did not have a separate provision for bribery aside from the abetment. The amendment now addresses the supply side of bribery, wherein any person who gives or promises to give an undue advantage to another person with intention to induce a public servant shall be punished by fine and/or by imprisonment for a term which may extend to seven years.

Further, the Companies Act of 2013 is known to be a draconian law because of the insertion of Section 447, which imposes a penalty on corporate frauds which may extend to three times the amount involved in fraud. 

Recently, India made a move to provide its citizens with comprehensive data protection rights by initiating the Personal Data Protection Bill of 2018. The Reserve Bank of India (RBI), in April of this year, mandated that data generated by India’s payment systems is to be stored in India. U.S. trade groups, representing companies such as Microsoft, have opposed India's push to store data locally. That push comes amid rising global efforts to protect user data but is one that could hit planned investments by firms in the Indian market, where companies currently have limited data storage. Our expertise in local laws and in-depth understanding of cyber forensics has proven pivotal to investigating and resolving high-stake matters involving data breach irregularities.

5. Are certain industries more vulnerable to fraud and corruption than others? Why?
“Every dollar spent on bribes is a dollar not spent on innovation.” – Brackett Dennison, Sr. Counsel, Goodwin Procter

Though we understand that the banking sector has a strong internal control mechanism, a small bug in the system can have a huge financial impact on the bank. During the course of our recent investigation, we came across a fraudulent method adopted by a borrower in consonance with bank officials, wherein Letter of Undertakings (LoUs) were issued to overseas banks through SWIFT messages, wherein no record was maintained in the Core Banking System (CBS). In turn, LoUs were being issued without the appropriate collateral in place. This modus operandi caused the bank a loss of $2 billion. Based on our past experience, we observed patterns of fraudulence, including the diversion and siphoning of funds, through inter-group shell companies; the creation of shell companies; re-routing of funds; and the entering of high-value transactions with a suspect individual leading to misuse of funds.

In India, the manufacturing sector is often one of the most vulnerable sectors in terms of corruption and fraud. In one of our manufacturing cases, we observed sales made without records in books, funds routed for circular transactions, inflation of books of accounts, inflation of stock statements, excessive cash payments, and misuse of inventory. In addition, the manufacturing sector is prone to contract risks wherein bids are awarded to related parties; fraudulent bids are submitted; products are counterfeited; or vendors are receiving kickbacks.

The construction sector is also prone to fraud and corruption due to collusion risks. This includes procurement actions being dominated by few large companies, awarding contracts to favored bidders, and companies with political connections using their influence to steer contracts to cartels or coerce other firms out of bidding. This sector also faces misrepresentation of goods, embezzlement of project funds by management or employees, bribery, and kickbacks.

6. What services and solution offerings is your practice focusing on in the year ahead?
With the implementation of new bankruptcy laws and government foresight to clean bad loans, we are continuing to develop solutions for robust banking systems and implementing proactive fraud risk measures. Our key focus is to design an Early Warning System (EWS) to allow banks to evaluate if an account is appropriately red flagged, thereafter conducting an investigation to assess facts and report the case to authorities. We currently have a team of 35 professionals dedicated to conducting forensic investigations on bad loans with the use of advanced analytics and market insights.
 
With India’s move toward a cashless economy, the government is planning to explore the use of blockchain technology proactively for ushering in the digital economy. We are continuing to innovate our capabilities in Blockchain-as-a-Service (BaaS), which will help reduce the need for trust between stakeholders, build a secure value-transfer system, help in reconciliation of business processes across multiple entities, increase record transparency, and ease of auditability. We look forward to leveraging BDO Global’s blockchain capabilities to gain visibility and penetrate the market. And, with data privacy laws in the process of implementation in India, we foresee high traction in cyber forensic solutions.
 
Furthermore, we will continue innovating our capabilities in anti-bribery and anti-corruption investigations in consonance with the POCA’s recent amendment; integrity and due diligence assessments in banks and PE firms; as well as in-house forensic technology labs, and will continue to undertake cross-border investigations.

7. What are the common trends you see in fraud prevention and detection, both in India and globally?
Today, businesses are shifting from reactive to proactive measures for assessing the fraud risks associated with their industry. Previously, irrational or impulsive actions were being taken by those suspecting fraud, which in many cases, led to mishandling the evidence, alerting a suspect in advance, treating innocent individuals unjustly, or being unable to take any disciplinary action against fraudsters. Gradually, Fraud Risk Assessments (FRAs) are being adopted to prevent fraud before it takes root in an organization.
 
The rise of whistleblower hotlines and open-door policies have allowed organizations to access early warning signals of potential risk areas. Periodic visual, interactive trainings are being imparted to employees to help them understand what behavior constitutes as unacceptable; hence, they will have a hard time rationalizing any fraudulent activity. We are also seeing increased focus toward the designing of robust internal control mechanisms, which prevent and monitor the violation of ethics and compliance guidelines within the organization. As an industry best practice, third-party due diligence is being exercised on vendors, agents, and distributors before engaging into contracts with them, in order to reduce a firm’s risk of dealing with an entity already in breach of laws and regulations.
 
On the detective front, we are seeing an increased adoption of computer forensics and data analytics in search and seizure operations used to gather digital evidence from a suspect’s laptop or handheld device. India is ranked third after the U.S. and China in terms of cybercrime incidents. We see an increasing opportunity for identifying modus-operandi in cyber-breach and data leakage investigations and have thereby developed robust response frameworks.